External Economic Factors

Once the company's stronghold waned, prices of rough and polished diamonds were more susceptible to wider economic forces of the kind that typically affect the prices of commodities, durable goods and consumer products.

This was clearly seen in early 2008, when the price of diamonds started climbing at a faster rate than they have done for some 30 years. This increase was, at least partially, driven by broad economic forces – some of them global, others local.

Polished diamond prices started their escalation in mid-2007 as the stock markets were nearing their pre-crash peak. The global economy seemed healthy, the mood was positive, and everyone was looking admiringly at the Chinese economic boom as the “Red Giant” was readied itself for the Beijing Olympics. In India, the growing middle-class was consuming western brands at growing pace and in Europe, countries such as Iceland were experiencing unprecedented prosperity.

Against this backdrop, and encouraged by generic diamond marketing campaigns such as “A Diamond is Forever,” consumers were buying more and more diamond jewelry. Their appetite was fueled by growing discretionary income, mainly in the U.S., China, India, Russia and the Arab Gulf states. Together, these markets consumed about $16 billion worth of polished diamonds in wholesale prices, which represented about 80 percent of global consumption that year.

While many consumers were enjoying this growing economic affluence, unnoticed by most people, the looming economic crash was beginning to make its early presence felt. The stock markets, which had hit their peak in or around October 2007, started to decline, following – albeit with a delay – the declining  They followed with great delay declining house prices in the U.S., which had started to decrease as early as February 2006 and had an unprecedented effect on the economy.

The wealth of most U.S. consumers is tied to their housing. According to a recently published study by three well-known economists – Robert Shiller, Karl E. Case and the late John Quigley – entitled “Wealth Effects Revisited – 1975–2012,” consumer spending moves in tandem with housing prices. Shiller and Case are known for their Case-Shiller Index, the housing prices index they created for the U.S. market.

The economists revisited a study they had conducted a few years earlier to examine the links between changes in housing wealth, financial wealth and consumer spending in the U.S. In the new study, they used a much wider statistical base than in the old study, examining the economic trends in these three areas from 1975 to 2012 – including the years of the 2008-2009 economic crisis and its lingering effects...

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